Confidentiality agreements (part 1): keep them simple

IP Draughts has reviewed hundreds, if not thousands, of confidentiality agreements (CDAs) for clients.  We have also written a book on drafting CDAs (see below) that includes a selection of template agreements.  These experiences have given us some strong views on their terms.

Here beginneth the lesson of IP Draughts on CDAs, that thou mightest know the certainty of those things, wherein thou hast been instructed.

  1. In most cases, the commercial objectives should be to provide reasonable protection for the information and to avoid expensive and time-consuming negotiations.  To this end, a conventional CDA can be used, that does not require special terms.
  2. Parties should develop template CDAs that they would be willing to use whether they are the recipient or the discloser of information.
  3. A good way of streamlining discussion of a draft CDA is to put forward a 2-way CDA, so that the recipient considers their interests both as a potential discloser and a potential receiver of information, when reviewing the draft.  This should reduce the likelihood of one-sided demands.
  4. The CDA should cover the following key areas:
  • definitions of confidential information and the permitted use of the information (eg review of the information to consider whether to enter into an agreement with the discloser)
  • restrictions on use (other than for the defined, permitted use), disclosure and (if required) copying
  • standards of care in keeping the information confidential
  • standard exceptions to the confidentiality obligations (eg information that is publicly known)
  • rights to disclose to employees, consultants and advisers
  • obligations to return the information
  • duration of the obligations
  • no obligations to enter into further agreements or update the disclosed information
  • law and non-exclusive jurisdiction
  1. In addition, where the information is particularly sensitive, practical measures can be required, eg keeping records of who receives the information, numbering copies of the information, allowing access only in a data room, disclosing key elements of the information to a trusted intermediary who may only disclose a sanitised report on the information to the receiving party, and so on.
  2. Sometimes, clients want the contractual obligations in the CDA to be extra-protective, given the importance of the confidential information – sometimes referred to as the company’s “crown jewels”.  In this situation, the lawyer’s first tasks should be to interrogate how necessary it is to disclose the information at all, to point out that CDAs are not a magic wand that can guarantee secrecy, and to enquire whether other forms of protection have been considered, eg patent filings.
  3. If, despite the warnings given in item 6 above, the client insists on having an “extra-strong” CDA, provisions such as the following can be considered.  Some of these provisions are likely to be resisted by receiving parties; some others are by way of clarification and may not add much legally to the primary restrictions of the CDA:
  • An obligation not to reverse-engineer the information, eg to find a chemical structure or software source code
  • A provision that any IP generated using the information belongs to the disclosing party
  • A restriction on using the information in any patent filings
  • An explicit statement that the information may not be used for commercial purposes nor used against the interests of the disclosing party

Recently, a client asked us for a new standard clause for its one-way and two-way CDA templates.  The information being disclosed included information on biomarkers, and the client wished to make it clear, or clearer than it was already, that the receiving party was not permitted to use the information to create assays in respect of this biomarker or conduct other research using the biomarker.  This point could be addressed by including a clear definition of Permitted Purpose in the CDA, but the risk was that a rather general definition of Permitted Purpose might be used that did not make this point explicitly.  We suggested the following wording:

…the Receiving Party shall not use any of the Confidential Information directly or indirectly in the making of any invention or the filing of any patent application, the development of any assay, to identify the structure or other qualities of any biological or chemical compound, nor in any other research or commercial activities, and the Receiving Party acknowledges that the Permitted Purpose does not include any such activities. 

Other drafting suggestions and commentary on the terms of CDAs can be found in our book, Drafting Confidentiality Agreements (2nd edn, Law Society Publishing, 2004).

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Filed under Confidentiality, Contract drafting

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